How does literary agency in China work?

China doesn't really have literary agencies, per se. The closest analogy is something called 书商 (book merchants), who play a prominent role in the relationship between writer and publishing house. Where a western-style agent will help negotiate a contract, take a cut, and step out of the way, the book merchants actually purchase book rights from authors, then re-sell them to publishing houses. The merchants are then responsible for seeing that the authors get their fees and royalties. Needless to say, it's a system ripe for dirty dealing, and during the heyday of this practice book merchants were considered something on the order of highway robbers. Over the past five or ten years authors have begun to wise up to the business aspects of their profession, and most now deal with publishing houses directly. There have been some signs of a burgeoning western-style literary agency in China, but it hasn't developed much.